Investor brains target smart climate finance

LONDON - Smart financing can multiply limited public funds to fight climate change, say investors targeting a financing gap and a major stumbling block for the world to agree a new climate deal.

Developing countries want rich nations to pay them to fight a climate change problem largely created by the industrialized world, under a deal meant to be agreed this month in Copenhagen.

But there is a huge funding gap as recession-hit developed countries struggle to make concrete offers ahead of a December 7-18 summit, meant to lay the framework for a new climate pact to be agreed next year to succeed the Kyoto Protocol.

Carbon markets have so far failed to deliver the tens of billions needed, deploying $6.5 billion in developing countries last year under carbon offset schemes under Kyoto.

There's a whole new world to look at in addition to carbon finance, said Murray Ward from the New Zealand-based Global Climate Change Consultancy.

Some developing nations want as much as 1 percent of the wealth of better off peers, while rich countries and analysts estimate the climate cost to developing nations at between $100 billion and $300 billion annually by 2020.

Only about $10 billion is on the table now. Double-click here for a factbox of climate costs, money on the table and proposed schemes.

You can see a huge difference in ambition levels, said HSBC climate analyst Nick Robins.

Ideas center on how to use limited public funds to mobilize much greater private sector cash of around $100 billion.

They range from public loan guarantees or high-risk equity stakes in projects, to bonds where governments sell notes which they repay over 10-15 years, getting up-front investor cash now to protect rainforests, for example.

BONDS, DEBT

I think institutional investors are attracted by a long bond and I think if you get public policy right you can produce quite attractive returns, said James Cameron, vice-chairman of green investors Climate Change Capital, speaking at an Environmental Finance conference earlier this week.

Investors want governments to assert the public interest, a reallocation away from business as usual, but their culture gets in the way, Cameron said, referring to high returns from investment in fossil fuels. Somebody's got to show how it can be done.

One new idea is to link a portion of industrialized nations' swelling sovereign debt to delivering on their climate promises -- which may give private funds the extra confidence to invest in alternative energy, but cost nothing in extra public commitments.

The approach could leverage private sector cash four times the amount of linked public debt, estimated the architect of the approach Michael Mainelli, founder of London-based Z/Yen.

Governments would benefit by differentiating their sovereign debt from all the rest under global, multi-trillion-dollar stimulus plans.

Investors would not only have the benefit of more confidence in green investments, but could also use the sovereign debt as a hedge on those investments -- because governments would pay a higher interest rate if they missed their climate pledge.